It is nice to save some time in the wee hours of the morning when I write these outlooks. You can often tell I am still half asleep from the typos, which I dutifully correct later when I am wide awake. Today, we will save some time because all you need to do is follow yesterday’s outlook with only a few minor adjustments. And don’t forget to watch the Weekly Forecast Video for even more detail.
From the perspective of the various index futures contracts with overnight data, the market is still balancing inside of Friday’s price action. For our core S&P 500 index, the price action is framed by Friday’s high and low, 4532.50 and 4438.50, respectively. Perhaps more meaningfully, the price action is bound by the converging 21-day line (green) on top and the 200-day line (magenta) coming up underneath:
So today’s advisory is almost a repeat of Monday, except perhaps now we can use Monday’s narrower price action as boundaries for today’s direction clues. Yesterday’s price action traded between 4514.50 and 4462.75. You could even start with the more limited overnight range between 4463.25 and 4496.50.
Thus is the confounding nature of a narrowing triangle and a stock market where neither the bulls nor bears have control at the moment. Seemingly, the market is balancing into the next big monthly inflation report set for Thursday and expected to exceed 7% as with last month. Triangles are tricky, though. Sometimes they break one way and then head in the opposite direction. Sometimes they break only to widen the triangle and lead nowhere at all. I am not fond of them.
What worries me the most right now is that I will wake up to Russia invading Ukraine one morning, and the response will light the fire to burn down the stock market. After all, every other Fourth Turning has ended up in a war.
If you have long-term “buy and hold” positions, it would be wise to buy portfolio insurance. Consider even some inexpensive, out-of-the-money put options. Insurance is critical if you own any FAANGMAN+T stocks, as many do.
The breakup of FAANGMAN+T, like the Dot Com bubble or even the Nifty Fifty of the late 1960s, is every bit the challenge to the S&P 500 Index that it was to prop it up in the final days of 2021.
There is buying in broad and international markets, even yesterday. The broad U.S. stock market was positive yesterday even though some of the major indexes, including the S&P 500 and the NASDAQ 100, were negative. And it makes sense as valuations are now more reasonable in many U.S. names that have dropped in half since the middle of last year. Take even the international markets for another example of more reasonable valuations. Look at how overvalued the U.S. stock market compared to its global cousins:
Both Emerging (Red) and Developed (Blue) market stocks have P/E ratios considerably lower than the U.S. based on a 10-year average. If you were a money manager charged with being fully invested, you would have to consider some international exposure at the moment, in addition to more defensive “value” stocks in the U.S.
For the moment, triangle patterns are challenging to call. With the overall pessimistic crowd, I still believe breaking to the upside for another rally leg is the scenario that will trip the most people up. That is what the market tends to do. One could also argue that the market has already baked higher inflation and five rate hikes into the cake. But the reality is that triangles are a 50/50 bet. Your guess is as good as mine.
Day Traders
While markets were somewhat quiet yesterday, the volatility potential remains high, primarily due to significant put positions. It will take actual buying (calls or stock) to pull markets up out of their negative gamma position. Implied volatility indicates about an 80 point S&P 500 index range possible from the opening price. The volatility trigger remains just above the 4500 strike wall at 4530.
There are no directional clues for the open. Let the market settle in. The overnight range is a potential breakout setup. Yesterday’s low (also the overnight low) at 4463 is a setup for a downside breakout. Consider it a possible long signal if the breakout fails. On acceptance, target 4442.50 first.
Look for internals to confirm any directional moves. Yesterday, markets broke overnight highs and lows just to bounce to the opposite end of the range.
A.F. Thornton